Payday lenders create long-term debt

Published 5:42 pm, Friday, April 1, 2011

A report released this week shows what area critics of the payday lending industry have long cited as reasons for needing to regulate the short-term financers.

Released by the Center for Responsible Lending, the 24-month study of 11,000 people shows the average payday borrower stays in debt for 372 days over a two-year period -- or more than twice the length deemed appropriate by the Federal Deposit Insurance Corp.

Having looked at borrowers in Oklahoma, which it reported is more tightly regulated than Texas, the study reports that people typically increase the frequency and size of their loans over time. During the first year of payday borrowing, the average individual borrows nine times. Those who continue borrowing in the second year borrowed an average of 12 times, according to the study.

About 44 percent of borrowers experience a default event during those first two years, according to the survey.

“Ultimately we hope this sheds light that these claims that payday loans are short-term. ... The reality is that’s not true,” said Diane Standaert, legislative council with the Center For Responsible Lending. “It’s a faulty financial product that just sets people into a cycle of debt that makes people worse off than they were before.”

Representatives with the Community Financial Services Association, which promotes responsible regulation of payday advances, disagreed with the study. Board chairman D. Lynn DeVault said the short-term lending the report tried to target is a needed option for many families.

“The fact is that millions of Americans are living month-to-month,” DeVault said in a statement. “They do not have the cash flow to pay all their bills at the beginning of the month, and they need help to make it to the next paycheck. In order to avoid a utility cut off, a missed car payment or expensive overdraft protection that can reach 1,000 percent APR, they come to us or other lenders in the short-term credit market.”

The issue is one that’s garnered attention locally over the past several years as the number of payday lending outfits has grown.

Rep. Tom Craddick, R-Midland, filed a bill that would close the loophole in Texas that allows payday and car title lenders to operate as Credit Service Organizations. The bill, which advocates say would help, was left pending on March 22 in the House Pensions, Investments & Financial Services Committee.

If passed as drafted, the bill would force payday and car title lenders to operate under the same rules as banks and credit unions, making them unable to charge interest rates that presently can be as high as 300 percent or more.

“A short-term loan should help families with a short-term problem,” Craddick had said. “However, payday and auto title loans turn into a long-term crisis when families find themselves in a spiraling debt trap.”

Texas Catholic Charities reported one in five of the people it helps had received a payday or car title loan. Austin Bishop Joe Vásquez testified at the Capitol that statewide Catholic Charities spent $1 million last year to assist clients struggling with payday loans.

If that money could be used to provide short-term help to families and prevent the need for high-interest loans, advocates said it would be more effective in actually meeting needs.

Representatives with the Center for Responsible Lending pointed to its report as different than other research because it followed borrowers during a long period of time to see if their debt remained after the first few months of the initial loan.

“Borrowers are misled by the promise of a short-term credit product when it is in fact designed and functions to keep them indebted for extended periods,” the report read.

Those who advocate for regulated payday lending said unless an alternative is presented, such financing options are needed and will be used by people who don’t understand what they’re getting into.